How to Handle the Market’s Summer ‘Hot Zone’

Caution in the Hot Zone

It’s August, and it’s hot in my hometown here in Southern California. It’s even hotter in Las Vegas, where I’m writing to you today while attending a business conference. Actually, the high temperatures surrounding me lately reminded me of the heat in the markets this time of year, which is something I call the “hot zone.”

The term “hot zone” refers to August, September and October, traditionally months where equity markets tend to do poorly when compared with the rest of the year. August usually sees a lack of activity due to summer vacations and the end of earnings season. It also usually sees a lack of buyers, which means stocks are more volatile than usual.

September and October represent hot-zone months where traders like to sell, especially after multiple years of big gains. And there is no doubt that during the past several years, stocks have enjoyed a nice run.

The three-year price chart of the SPDR S&P 500 ETF (SPY) clearly shows the multi-year run in stocks. It also, however, shows that so far this year, the trading range has been very tight.

I expect a continuation of this range-bound trading in the hot zone, as investors will remain über cautious in front of what could be the first Federal Reserve interest rate hike in nearly a decade.

While caution in the hot zone is always a good idea, this year it’s even more important, given the tired nature of this bull market, as well as the potential headwinds on equities from the Fed, the commodities plunge, an emerging market equity meltdown and “just okay” earnings.

In my latest Weekly ETF Report video, I show you several more charts that reveal the big slide in many of the key markets that represent additional reasons to be cautious in August, September and October.

Watching this video will help you understand why caution in the hot zone is so important.

Plus, I also show you a few examples of so-called “smart-beta ETFs” and why their respective outperformance represents a good tool for investors looking to beat the major indices.

Wisdom from London

“You can’t wait for inspiration. You have to go after it with a club.”

— Jack London

The excellent novelist puts on his motivational speaker hat in the above quote, reminding us that if you want to achieve anything, you have to go out with fervor and grab it.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week about being cautious with commodities. I also invite you to comment in the space provided below.